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HP-Compaq: Still Time to Call It Off

Shareholders, customers and employees of Hewlett-Packard and Compaq should be thankful for the laws of the United States that mandate a careful review of all mergers such as that proposed between the companies.

Shareholders, customers and employees of Hewlett-Packard and Compaq should be thankful for the laws of the United States that mandate a careful review of all mergers such as that proposed between the companies. The time it takes the Securities and Exchange Commission and the Department of Justice to look things over imposes an opportunity to rethink the wisdom of such deals.

The companies are troubled—even the principals admit that. At issue is whether each company separately can fix its problems or whether the companies together can fix them better and faster. We can find no reason to believe the latter to be the case.

First, their problem is how to compete with Dell as a low-cost, direct hardware provider. Its not clear how the companies together could match or improve upon Dell any better than they have separately. HP-Compaq would have to revolutionize the notion of streamlined business processes as never before, and Dell will have at least a year to widen its lead.

Second, HP-Compaq would have to bring together its fragmented server operating systems to face Suns clear road map. Compaq has dropped the ball on Alpha, and HP is transitioning from PA-RISC; its not likely that the installed bases of both companies will move in lock step to Itanium.

Further reading

Third, HP-Compaq would have to build its combined services operations into a credible competitor to IBM. HP services arent geared to consulting, management and integration. Compaq Global Services could help HP. But wouldnt it have made more sense for Compaq to finally exploit the services unit it acquired from Digital and for HP to keep trying to acquire a credible services company? If youre a customer, would you wait a year or two for HP to get its integration act together, or would you just go with IBM now?

Finally, just how many employees will be let go? The companies are already laying off a combined total of 14,500 employees. HP CEO Carly Fiorina said that 15,000 more will have to go—and many analysts think that number is low. How can you build up your services wing when you are paying out many millions to send people home?

All IT users, especially HPs and Compaqs customers, need innovation and competition. They would get this from two healthy companies, each with bold and competent leadership. They are very unlikely to get it from a single, merged, deeply troubled company. Theres still plenty of time to do the right thing, and pullout penalties wouldnt apply if both agree to withdraw. HP and Compaq need to get back to the business of innovating and competing with Dell, Sun and IBM.

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